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What is a loan commitment?
A loan commitment is a formal letter from a lender stating that the applicant has met all of the qualifications for receiving a loan, and that the lender promises a specific amount of money to the borrower.
Many loan commitments are open-ended, meaning the loan is not just a one-time, lump sum payment that the borrower must pay back. Instead, the borrower can continue to use this amount as long as he or she keeps paying it back. This makes it similar to a revolving line of credit, such as a credit card. If the borrower uses a portion of the loan amount and pays it back, the lender applies the payment to the borrower’s principal balance.
An open-ended loan commitment is contingent upon the borrower’s credit status and requires meeting certain qualifications. A loan commitment can be either secured or unsecured. An unsecured loan requires no collateral, but a secured loan does.
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Loan commitment example
Marcus applies for a mortgage and he receives several notices throughout the process letting him know the status of the loan application and explaining how everything works. First, he receives a prequalification letter that confirms that he meets the qualifications for the loan, but that the lender must review his documentation before making a final decision. Once the lender receives and reviews all of this documentation, and decides to offer Marcus a mortgage, it sends a loan commitment letter confirming the decision. The letter will include the amount of the loan as well as all the terms and conditions such as the interest rate and term.